The author is a Forbes contributor. The opinions expressed are those of the writer.

Loading ...

Loading ...

This story appears in the {{article.article.magazine.pretty_date}} issue of {{article.article.magazine.pubName}}. Subscribe

In pursuit of profit, people turn ideas into products and services. If the idea people work for start-ups, they are in immediate danger as soon as they file for a patent -- in so doing, they make public the details of their invention.

And by making their idea public, they become vulnerable to two types of economic predators. There are big, deep-pocketed companies that might look at the details of the startup’s idea and decide to come up with their own product using that technology. If the big company gets its product to market fast, it could doom the startup – which generally does not have deep enough pockets to pay lawyers to protect its invention.

And then there are what President Obama dubbed this June “patent trolls” – firms that sue companies to extract licensing fees. In June, Mr. Obama’s administration issued five executive actions and seven legislative recommendations “designed to protect innovators from frivolous litigation and ensure the highest-quality patents in our system,” according to a White House statement.

Not only do patent trolls join big companies in inflicting pain on startups, but they do so without ever intending to produce a product for customers. As Obama said in February, “They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”

A Boston University law school study estimated that patent trolls cost US companies about $29 billion.

One of the most prominent of these patent troll firms is Intellectual Ventures – that was founded in 2000 and is run by former Microsoft chief technology officer Nathan Myhrvold. It owns a reported 70,000 patents and this year announced plans to sue financial firms for patent infringement.

Patent trolls have hurt Google Venture’s-backed LevelUp, a Boston-based company whose pay-by-phone system is growing rapidly, but has recently been forced to respond to inquiries searching for potential patent violations.

LevelUp -- available for the iPhone, Android, the mobile web, and as a physical card -- lets users register credit or debit cards. LevelUp gives them a unique QR code that allows those users to scan to pay at the “over 3,000″ stores that have agreed to participate in the company’s program. And once the transaction is finalized, consumers get an emailed receipt.

Priebatsch was proud that LevelUp is creating value for merchants and consumers. One consumer told him “LevelUp saved my life today.” That customer’s exaggeration surely reflected his glee at being able to use LevelUp to buy lunch without the wallet that he had mistakenly left at home.

LevelUp participating merchants don’t have to pay credit card companies’ nasty payment processing fees — that range between 3 percent and 6 percent of each transaction. In fact, LevelUp only gets paid for bringing in new customers to the merchants, or bringing customers back repeatedly “with a built-in loyalty mechanism.”

For example, a merchant might use LevelUp to run an incentive program in which a consumer will get a $2 credit for every $10 worth of merchandise bought. Of the $8 that a consumer spends on that program, LevelUp gets 70 cents, according to Priebatsch.

And since merchants pay $50 billion a year in those payment processing fees, LevelUp has the potential to save them billions while keeping its “more than 200,000 end-users” happy.

But LevelUp – which has raised a total of $50 million in venture funding -- has been impeded in its mission by patent trolls. Priebatsch told the Boston Globe that “patent trolling has cost the company over a million dollars while preventing the hiring of an additional 10 to 20 employees.”

One of those patent troll suits involves a claim about technology for attaching text messages to a credit card, so the message can be printed on receipts.

As Priebatsch explained to Xconomy, “Kind of an interesting idea, totally irrelevant to LevelUp. The patent troll knows it’s irrelevant to LevelUp, but knows the imbalance of costs—that for us to pay them $150,000 to go away is much cheaper than paying $1.5 million to prove that this in fact has nothing to do with us.”